The Court of Appeal has declined to limit an engineer’s potential liability for foundation works because the standard form agreement containing the limitation clause was not signed or adequately notified to the client at the time of engagement.1 This decision illustrates the importance of proper documentation in projects.
The Montecillo Trust (Montecillo) engaged David Rutter, an architectural designer, to design the new rest home and hospital building in Dunedin and to recommend professional assistance. Rutter, acting as agent for Montecillo, engaged Stevenson Brown Limited (SBL) as engineers to design and supervise construction of the foundations. There were no signed terms of engagement for either Rutter or for SBL. After construction completed in 2006, the rest home suffered around NZ$5 million of damage as a result of physical settlement on the site. Montecillo claimed that the damage occurred as a result of SBL’s negligence.
The issue for the Court – the inclusion of the standard form limitation clause
Before the negligence claim was argued, the parties wanted the Court’s advice about whether SBL could potentially be liable for the whole of the loss or if SBL’s liability was capped at NZ$100,000 due to a limitation clause in its standard terms. The problem arose because Rutter and SBL followed their usual practice (and common practice in the market) of not having a formal terms of engagement signed.
In the case of the construction of the Dunedin rest home, Rutter (as agent for Montecillo, the principal) engaged SBL using the following process:
- Rutter and SBL met to discuss the project. At this point, the Court suggested that an oral contract between Montecillo and SBL was formed.
- SBL faxed some preliminary designs to Rutter, along with its terms of engagement. The terms included reference to the model IPENZ/ACENZ short form agreement. It is this agreement that required SBL to act with due skill and care (i.e. could give rise to the negligence claim), and it is also this agreement which contained the limitation clause limiting the engineer’s liability to the greater of five times the value of the fees (excl. GST and disbursements) or NZ$100,000.
- As was usual practice for SBL and Rutter, the terms were sent with a request that they be signed by the principal and returned.
- As was also usual practice, the terms were not signed and were not returned. In this particular case, Rutter actually removed the terms of engagement before sending on the designs to Montecillo. This was done on the understanding that the terms should be supplied with the first invoice for services, which was subsequently the case.
The Court of Appeal was asked to decide whether the IPENZ/ACENZ short form agreement applied, either because Montecillo and SBL had agreed to it or because the usual practice of Rutter and SBL meant that it was impliedly agreed to.
No evidence of agreement to terms
SBL put forward a lot of evidence about its usual practice and how it believed that the terms were incorporated into its contact with Montecillo. The Court rejected this evidence, clearly stating that it is the parties’ conduct that matters – what they said and did, not what they say they believed – and that an outward manifestation of agreement is required. The Court also noted that silence doesn’t equal agreement – the fact that Montecillo didn’t object to the terms doesn’t necessarily mean that they agreed to sign up to them. As a result, the Court found that there was no specific agreement between Montecillo and SBL that the IPENZ/ACENZ terms would be included.
Prior practice known to agent not relevant
SBL then argued that its usual practice with Rutter meant that the terms should be implied in any engagement that Rutter brought about. In this case, Rutter and SBL had worked together 11 times before and in each instance the standard form contract had been sent but not signed.
The fundamental issue for SBL to overcome in this case was that Rutter had been acting for different principals in those prior dealings. So even though Rutter had information about the past practice of SBL, that information couldn’t be attributed to Montecillo because the information arose before the agency arrangement was entered into.
There is a legal principle that is sometimes used in agency law called ‘agent to know’. Under this principle, the knowledge of an agent is attributed to a principal even if it was acquired prior to the agency being formed, on the basis that the agent in question has been engaged because of their particular and specialised knowledge.
In effect, the principal is buying the agent’s knowledge. SBL attempted to argue that Rutter fit such a description, but the Court did not agree. As a result, the Court found that there wasn’t sufficient knowledge on Monticello’s part about the prior practice of SBL to say that the terms were automatically included.
This case doesn’t confirm that terms of engagement will never apply unless countersigned by the other party. Instead, it acts as a warning: if a contactor wants to include limitation clauses or other standard terms it needs to clearly identify those to the other contracting party and, ideally, have them written down and confirmed in writing. Relying on prior dealings with the agent is risky at best.
Please contact our team if you would like advice on construction contracts or any of the other issues raised in this update.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.